Nokia, Pots, and Teakettles

So Nokia wakes up one day and decides that it is tired of having to make royalty payments to Qualcomm.

Not content to roll up sleeves and sit at the negotiating table, or even to slug it out in court with a battery of countersuits, Nokia has now embarked on a global communications campaign to vilify Qualcomm by suggesting that the San Diego tech firm is, by its actions, slowing the adoption of 3G.

Carriers have made billions of dollars in investments in 3G licenses and gear, and Nokia’s CTO, Tero Ojanpera appears to be trying to drum up a groundswell of sentiment from around the industry to force Qualcomm to give in to Nokia’s royalty demands and to stop defending its intellectual property. Ojanpera was playing to a receptive crowd – Qualcomm has been the punching bag of Korea’s techno-nationalists for years.

As a communicator, I give Nokia credit for trying to sow a meme that would get Qualcomm convicted in the court of public opinion. If it had worked, it may well have pushed Qualcomm into a corner and helped Nokia win its cases.

Unfortunately for the Nokians, in this industry, memories aren’t that short. Too many of us remember how Nokia handled CDMA. First, they ignored it. When they couldn’t ignore it, they ridiculed it. When they found they had to adopt it for 3G, they struggled for two years to figure out how to make it work because they wouldn’t ask Qualcomm for assistance. Now that they’re in the 3G market and paying royalties, they appear to be trying to cripple – if not squash – Qualcomm for being right in the first place. Remember, if you will, that Qualcomm is NOT a competitor – it is merely an upstream technology provider. A vendor.

Open note to Nokia. Look, guys, I know it really bruises the ego to realize that despite all of the handsets you sell, you are nowhere near as strong on technology or design as you would like us to think you are. But lighten up a little. Be grateful to the folks who invented all this stuff so you could find ways to package it, market it, and sell it. Stop trying to pretend that you are the font of all good things in the mobile communications industry. Be a little more of a partner and a little less a wanna-be Vainamoinen. You may well find out that the goodwill it earns you will help out in the long run.

We love the towns, the towns that go “boom”

Superb article by Peter Hessler, with photos by Mark Leong, in the June National Geographic (viewable online here) that does the best job describing China’s industrial entrepreneurs through a close-up of the heart of China’s Horatio Algerism, Wenzhou.

I’ve been hearing and reading bits and pieces of apocrypha about Wenzhou for years. This article really pulled it all together.

The Real Way to Stop Terrorism

All You Need is Love” by Bruce Hoffman in The Atlantic Monthly, December 2001

In all of the global discussion among defense specialists about how to stop terrorism, digging deep into the history of counterinsurgency, a clue on one highly effective tactic comes from a highly unexpected source.

At one point, the PLO apparently needed to shut down their own fanatical terrorist unit, Black September.

How did they do it?

They set it up so each of the bloodthirsty, testosterone-fuelled and demagogue-gueded young men got married, help starting a new life, kids, and steady, rewarding jobs.

In other words, Tom Barnett is right. You give the terrorists something to live for through connectivity and hope for a better future, and you will eliminate the problem far more quickly and effectively than you will with brute force alone.

All of which brings up another point: Hamas and the Palestinian Authority have at their disposal the means to end terrorism now. After all, the Palestinians wrote the book on domesticating wild dogs. The fact that there are still people running around the region with outerwear made from plastic explosives means that they still find these tactics useful.

For more, read Hoffman’s book Inside Terrorism, and Barnett’s books The Pentagon’s New Map and A Blueprint for Action.

When Jerry Yang Talks China, Run for the Doors

In the Hutong
Trying to believe this
0042 hrs.

Jerry Yang spoke recently at a tech entrepreneur conference in Santa Clara about Yahoo’s plans to form an online advertising exchange within China.

Ignore, for a brief moment, how competitive and fragmented China’s online advertising industry is. Ignore also that other companies (like, say, Google) have a superior kit of advertising tools than Google. Ignore also that Google has more credibility with online advertising, and that it’s going to be tough to build credibility. All of these issues – and the host of other business challenges that Yahoo! faces as it goes this route – are by no means insurmountable.

Focus instead on the fact that every time Jay Yang has taken charge of Yahoo!’s China strategy in the past, the results have been, well, considerably less than stellar.

First, he decided to sneak Yahoo! into China – take the stealth approach, as it were. That worked so well that Yahoo! was stomped by local players like Sina, Sohu, and Netease who did not feel compelled to fly low and avoid the radar.

Then, he got talked into having Yahoo! buy local search engine 3721 and turning over Yahoo! China’s future to the control of 3721’s mercurial founder. Eighteen months and over $100 million later, that imploded, and Yahoo!’s position in China had slid even further.

Finally, he handed the China business and $1 billion to Alibaba. That hasn’t failed yet, but the jury is definitely still out. Yahoo! China has apparently fallen to a distant third in the search engine rankings behind Google and Baidu. Yahoo!’s Chinese landing page looks like a rip-off of Google’s, so there is no pretense of competition with the portals anymore.

Any other executive with a similar track record would have been reassigned, if not fired, long ago.

And now Jerry wants Yahoo! China to be in the advertising exchange business.

Is anybody at Yahoo! the least bit concerned?

The only silver lining in all of this is that Jack Ma is running the ball. I’m still skeptical, but I give Jack the eBay killer an even chance.

If They Can Knock Off Disneyland…

In the Hutong
Mixing a cold cocktail of one part disgust, one part mirth, and three parts burnout
0016 hrs.

So the world has discovered that Beijing has a theme park that significantly knocks off Disneyland. While park executives deny any relation to Disney, the place’s tagline is “because Disneyland is too far.”

Right. Check out the article in JapanProbe and judge for yourself.

Here’s a thought: what hope is there of having the government shut down pirates in the provinces if they’re allowing a state-owned enterprise knock off an entire theme park right in the nation’s capital?

The government will not help IPR property owners as much as they can help themselves. Focus on building a path to your customers, then go after the miscreants. You’ll have a better shot at moving the enforcers to action when your enterprise is employing people and paying taxes, too.

Delta Airlines Should Fire Their PR People. Now.

In the Hutong
Watching the Markets
2139 hours.

In an absolutely unforgivable PR gaffe, Delta Airlines PR department or agency decided to have the airline’s CFO do an remote interview about the company’s emergence from bankruptcy in a loud, echoing hall filled with screaming Delta people. In the end, it was impossible for the CNBC anchors to conduct the interview because it was impossible for the Delta executive to hear anything. Holding both hands to his ears and smiling gamely, the executive hardly presented the image of confidence, competence, and cheer that would make me want to fly with them anytime soon.

Whoever in the Delta organization or agency suggested that setting for an interview deserves to be put on permanent waivers. The whole thing did hideous damage to Delta’s image at a point where image is critical. Completely uninspiring, unnecessary, and unprofessional.

McKinsey Likes SMS Payments

Starbucks
Pacific Century Plaza
Marveling at the quiet
1130 hrs.

The thinkers over at McKinsey & Company are becoming advocates of taking the cash out of China’s cash-driven economy, something we in the Hutong heartily endorse. In a recent brain-tickler by three of their China consultants, McKinsey released an article advocating the use of China’s SMS system a means to allow China’s masses to make and receive payments and transfer funds. One hopes that the folks at ATM manufacturer Diebold (NYSE: DBD), smart-card maker Schlumberger (NYSE: SLB), and electronic payment gear-maker VeriFone (NYSE: PAY) aren’t on McKinsey’s client list, but we digress.

The Idea Givieth…

The idea is not terrible, and from the 35,000-foot altitude from which McK examines the option, it makes sense and seems simple. As is always the case with these “big idea” thought leadership pieces, the positives receive a lot of play, and the obstacles are minimized. The Philippines loves their SMS payment system, so why not China?

Without addressing the macro-economic problems of having so much cash in circulation (especially as the economy grows), there is much to recommend a consideration of McK’s proposal. At first glance it seems more practical than adding tens of thousands of ATMs and point-of-sale (POS) devices. Over 15% of rural Chinese already use mobile phones, and that number is growing. The article is a little too dismissive – if not cavalier – about the severity of the challenges, however, and it takes a simplistic approach to a complex problem.

…but the Details Taketh Away

First, you would need China’s numerous banks to work together to ensure that payments could move easily from one financial institution to another. Banking in China is intensely competitive, so much so that the effort to unify the clearance of bank and debit cards is still challenging the country. Ask any retailer how many different card machines they need to have at a point of sale – 15 years after the effort began to unify the systems – and you will realize the magnitude of the problem.

Second, as generous and public-minded as China’s mobile operators are, I’m not certain they would be ready to give their bandwidth to a profit-making operation without taking at least a small cut beyond the RMB¥0.15 they take for the cost of an SMS. Quite likely they would levy some charge on the transfers, which would then need to be added to the commissions and transfer fees that go to the banks. The Charges, in other words, are already starting to add up. Ask anyone with on-the-ground retail experience in China and he will tell you: for most Chinese, especially the low-income consumers that are the target of an SMS payments system, such fees would create a powerful disincentive to use SMS payment versus simple cash. If you ask the merchants to take on those charges, it is a disincentive for them to accept payment versus cash.

Even if you reduced the payment to something even the poor would almost find insignificant – I’m thinking, say RMB 0.01, or one fen, it would require 46 billion transactions just to pay back the capital costs of the system.

Third, although the article lightly flicks over the issue of public trust, this will take time – and money. McKinsey estimates that it will take between US$40 million and US$ 60 million to set up the system. While they fail to give a cost breakout, the context of the article suggests that this would include purely the infrastructure costs. The effort to build and sustain public trust in the system would involve a considerable expenditure in marketing, including advertising, PR, point-of-sale support, and – most critically – a word-of-mouth program. Given the size of the market and the particular challenges involved in reaching and building safe-as-houses trust for the system, the costs for a program like this could easily run into the tens of millions of U.S. dollars.

Finally, McKinsey is a bit too optimistic in proposing the mobile phone as the nexus for a rural payments system. The 15% of China’s rural adults who own mobile phones are the low-hanging fruit. Getting a large enough percentage of China’s rural population to buy and own mobile handsets is going to take several more generations of innovation in handset technology, cuts in usage costs and, at some point, a system of subsidies that make handsets available to the genuinely poor. A $40 handset sounds like a great deal, until you realize that to a massive part of rural China that represents six weeks or more of family income.

There are other issues as well. Security for one – in a nation where your average mobile user changes phones every 15-18 months and the second-hand market in handsets is booming, the challenge of residual information on the handset is a tricky one. And that’s just one problem. No aspersions on the ingenuity of Filipinos, but China’s hackers are among the world’s finest. Hacking the security on a digital phone network becomes extraordinarily lucrative if you have billions of monetary transactions taking place.

No thought is given to the banking infrastructure required to support this, especially since an immense proportion of the people McKinsey seeks to target with this system are “unbanked.” Either you’ll have to develop a safe and convenient debit system (read: pre-pay), or you’ll need to come up with a Grameen Bank equivalent in China. Either way, without one or the other, the system is essentially a non-starter.

The Argent Projectile Fallacy

What is most concerning about McK’s approach – in particular given the reputation of the source – is that it suffers from what we call The Fallacy of the Argent Projectile. It is frustratingly common in technology generally but in China specifically for an innovator or ideator (someone who creates or adapts an idea) to suggest a single-factor, simple solutions to a complex problem.

I am a big fan of simplicity, but I am also painfully aware of H.L. Mencken’s reminder that “to every problem there is a solution that is simple, workable…and wrong.” There are, in essence, no silver bullets.

The One Laptop Per Child (OLPC) project will not bridge the digital divide by itself, but it is a good step in the right direction. Unseating and executing Saddam Hussein did not by itself give Iraq a participatory, pluralist future. And even if you overcome all of the obstacles and challenges, SMS payments will not wean rural consumers off of their reliance on cash – the handset ownership numbers alone ensure that much.

Fix Problems with a Full Toolkit, Not Just a Hammer

Addressing the challenge the People’s Bank of China (PBoC) has posed to the nations banks to develop a new rural payments system is a complex issue. I have no doubt the PBoC would love it if there was a silver bullet answer, but there probably is not.

There is an old saying that when you have a hammer, all of your problems start looking like nails. A wise carpenter, on the other hand, knows he needs a full box of tools. An intelligent approach to rural payments would be a complete, evolutionary, and inclusive system that provides consumers with the best of all worlds:

1. A system of rural banking that makes it economical, indeed profitable, to service micro-depositors. India and Bangladesh have made immense strides in this direction, and there is much to learn from them.

2. Companies like Diebold and VeriFone need to get going on innovations that will make both ATMs and POS equipment suitable to service China’s rural masses (i.e., make them simple, rugged, and an order of magnitude cheaper.)

3. A unified national clearing system for micro-payments, debit, and credit cards that by sheer volume would drop the processing cost per transaction, and that could even use credit and debit card charges to partially subsidize a rural payment system.

4. A debit system based on pre-payments using commercially available smart SIM technology usable by inexpensive handsets.

5. An SMS payments system that integrates with – and compliments – all of these other initiatives.

There is already a natural propensity among policy makers in the PRC to try to shoot their way out of problems with simple solutions rolled out on a massive scale. This should be discouraged – the line between “simple” and “simplistic” is a narrow one indeed, and the last thing the nation needs is intelligent outsiders encouraging this misguided approach.

Dell Picks Ubuntu

Purely beyond my evangelism around Ubuntu Linux as my second-favorite Windows Alternative (Mac OS X being first), there is something kind of cool about a huge Texas computer manufacturer selling computers with an operating system underwritten by Africa’s first astronaut…

First, let me lay aside for a moment by DellSmacker and say “great job, guys” for taking a seemingly small but significant step toward offering users a wider choice of operating systems by offering new Dell computers preloaded with Ubuntu. In all of the years Dell has sold computers, you could change anything about the things, including the type of processor, but you could never change the fact that your computer would ship with Windows.

Now comes the question: can they actually market this, or will it just go onto the options page and die?

We will get to that after we have had a chance to see. In the meantime, credit where credit is due. Kudos, Dell.

Update: Actually, Dell DID offer Red Hat before, in 2000-2001. They stopped selling it after a year. It just went away. Industry watchers suggest it was pressure from Microsoft that caused them to stop.

Which, again, all points heavily to the question: how much is Dell going to put into supporting this. And how much is Canonical?

Barbarians at the Gate and Private Equity’s Rule-Set Reset

With the stack of books on my desk that await my attention, I don’t know what propelled me to take the time to revisit Bryan Burrough and John Helyar’s outstanding Barbarians at the Gate. But given what is happening in China’s financial markets, I’m glad I did.

If you’re not familiar with the work, Barbarians at the Gate is an engrossing, deeply entertaining telling of the 1988 saga of how the wealthy, cosseted management team of RJR Nabisco tried to buy the company from its shareholders, only to watch the buy-out turn into a vicious battle to control the company. More than the story of a single company, the book is a case study of what happens when the predatory forces of what Thomas Friedman calls “the financial herd” encounter large corporations arguably awash in inefficiency and waste.

Despite this being a book written by two Wall Street Journal reporters, none of the players comes out of this looking particularly good. The book also calls attention to the political debate surrounding mergers, acquisitions, and private capital, and in the end underscores that both sides have a point. The financial tools that enable these transactions can be used for good or ill.

Used for good, they can unlock the assets and hidden profits of a moribund corporation to the benefit of employees, shareholders, and broader community.

Used for ill they can be used to perform the legalized equivalent of what wise guys in the Syndicate used to call a “bust-out,” or the systematic transfer of company assets into the pockets of a few individuals, followed by bankruptcy.

Nearly three decades after Michael Millken raised the much maligned junk bond to the level of high finance, launching a wave of mergers, acquisitions, buy-outs, spin-offs, and bust-outs that changed the face of capitalism. In that time, business in the United States (and to a lesser extent, Europe) have watched the systematic dismantling of the industrial conglomerates created in the wake of World War II.

As a result, people running public companies in America think a bit differently than they did three decades ago. Partly as a result of these financial machinations, American businesses are once again globally competitive, after a very long period of time in the late 1970s and throughout the 1980s when we were all questioning if they would ever be so again.

Which brings us to China.

Barbarians at the Jianguomen

Today, the people making the policies that affect China’s financial services industry are weighing the pros and cons of allowing just that sort of “creative destruction” to take place in China. There is a lot to argue for it – and a lot to argue against it.

On the pro side, the guys in Zhongnanhai understand that waste, inefficiency, graft, and corruption are rife in major Chinese enterprise, and they all profess a desire to end that and create a host of globally competitive Chinese enterprises. They see there is a role for government to play in that process, a role for the market, and a role for financial markets.

Yet in the face of the public history of the financial industry of the last 30 years, you understand why China’s leaders hesitate at the brink of unleashing such a wave of Schumpeterian mass destruction. Especially when in their eyes that effort carries the prospect of millions of downsized Chinese workers and a host of accompanying political and social problems, and especially when allowing The Herd to fill their pockets in the process implies some politically unsavory images in a land that remains at least nominally communist.

No senior official wants to preside over an industry where an RJR Nabisco-type fiasco is taking place. In fact, China’s leaders, bureaucrats, and cadres are mortally afraid of allowing any transaction that might generate the least significant public concern, media attention, or political outcry. Imagine for a minute being a Communist Party cadre reading Barbarians at the Gate one evening before bed, then the next day having to sit down with a group of foreign investors looking to buy a major Chinese business. How could you notbe concerned, if not terrified, especially as another major financial firm seems to set up shop in Beijing, Shanghai, or Hong Kong each week?

Kinder, Gentler Barbarians?

As a corporate communications specialist, a certified spin-doctor, you would expect me to say that any financial firm seeking to engage in creative destruction in China has got to make sure it positions its intentions in China correctly, delivering just the right messages to China’s alerted (if not alarmed) bureaucrats to assure them that you are looking out for their best interests.

I would – if it were that simple. It ain’t.

While I am a big fan of saying that business in China is fundamentally the same as doing business anywhere else, unless you understand what those fundamentals are, you’re lost in China.

One of the fundamentals that has enabled the immense success of the financial services industry in the U.S. is the understanding that while strategies remain constant, tactics – how you execute your purchase, integration, and sale of corporate assets – depends on the commercial and political environment and how it is evolving.

There are some extraordinarily bright people at private equity giant Carlyle, people who understand how messages need to be delivered. And yet Carlyle’s purchase of a controlling interest in heavy-equipment maker Xugong demonstrates that the financial services

China demands a different type of execution, one that addresses the concerns of regulators and does not incite – or carry the prospect of – significant political backlash. China’s regulators are looking for companies that understand the delicate line they walk between charting the nation’s future and taking care of the social and political issues they must deal with today.

In short, rather than waiting to hear messages, policy makers are looking for evidence that someone in the growing procession of private equity firms understands the political and social challenges of letting foreigners buy up China’s most promising business, and are willing to go out of their way to address them – in advance.

Because if they haven’t read Barbarians at the Gate, or something like it, they will soon.